Manufacturing Perks Up In April - May 1, 2012

The recently slumbering U.S. economy, in clear need of a lift, received one in the past hour as the Institute for Supply Management, the Tempe Arizona-based trade group, noted that U.S. manufacturing activity had perked up in April, posting a better-than-expected reading of 54.8 for the month. That exceeded the 53.0 survey result expected, and the prior-month measure of 53.4.

Overall, this was the report's best score since last June, when a reading of 55.8 was achieved. Thus far in 2012, the survey results have been 54.1 in January; 52.4 in February; 53.4 in March; and the aforementioned 54.8 this past month. It should be noted that a composite tally above 50.0 signals that the nation's manufacturing base is growing; a score below 50.0, but above 42.5 over time, is indicative of a contracting manufacturing sector, but no recession. When this metric registers below the 42.5 area. the score is suggestive of a national recession.

According to sources at the ISM, an annualized reading of 54.8--not just for one month--would be consistent with gross domestic product growth of 4.1%. That is about two percentage points above the recent-quarter's experience and, most likely, about two percentage points in excess of the prospective current-period GDP growth rate. Such a vigorous pace of expansion seems unlikely at any point this year.

Meanwhile, this was an encouraging report in its own right, and a number of individual components in the report suggest that this core industrial sector is now doing somewhat better. Specifically, the report affirmed that not only did the aggregate score of 54.8 exceed expectations, but that such components as new orders, up strongly in the past month, production, employment, and exports did especially well. Encouragingly, prices held steady in April, albeit at a high 61.0, indicating that inflation wasn't yet a worsening or widespread problem.

On the other hand, supplier deliveries were still struggling, albeit less so than in the prior month, while backlogs were faltering, registering a decline, following a nice advance in March.

All in all, manufacturing activity is still picking up speed, as this metric registered its 33rd straight monthly expansion, nearly equaling the 35 consecutive months that the economy, at large, has been growing. The report was also encouraging as several other data issuances of late have been lackluster, including reports on weekly jobless claims, personal consumption expenditures, and consumer confidence. The report was not a game changer, to be sure, but it did reinforce our confidence that the domestic economy, unlike its counterpart in the euro zone, is not on an imminent road to recession.

Finally, there are the purchasing managers themselves, who were interviewed for this survey. They were generally upbeat in their appraisals, with those in the chemical products sector saying that they expected production to start increasing; machinery makers, meanwhile, noted strong demand ; while in fabricated metals, they were seeing the economy off to a good start through the first quarter, but that Europe was posing some risk going forward. Purchasing managers in primary metals and plastics were also upbeat, and things were starting to pick up in furniture and related products, which is a good sign we think, given the weak state of the U.S. housing market.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.